Article By: Keith Campbell
engineeringnews.co.za
5th June 2009
South Africa is not spending enough on defence to maintain its defence industry, warns Denel Group CEO Talib Sadik. Denel is the State-owned defence industrial group.
“South African defence spending is about 1,2% of gross domestic product (GDP). To sustain a defence industry, it needs to be higher.
“The capabilities we have in our national
industry are not maintainable on our current defence expenditure.
“Other developing countries have defence expenditure between 1,7% and 2,5% of GDP.”
By comparison, India spends 2,5% of its GDP on defence. Indeed, some countries have even higher levels of defence expenditure. For example, the proportion for Chile is 2,7%, for Egypt 3,4%, and for Turkey 5,3%.
Largely unnoticed in South Africa, other countries have begun to ramp up their
defence spending and use this to benefit their national defence industries (both public and private sector).
Thus, Brazil is consciously using major new equipment programmes to strengthen and diversify its defence industry, because it is a high-tech sector with many spin-off benefits to the wider economy.
These include a more than €7-billion programme to acquire four French-designed submarines (three to be built in Brazil), a deal which will include the construction of a specialist yard to build the vessels, technology transfer and French assistance in developing the hull of a future Brazilian nuclear-powered submarine; a €1,89-billion deal with Eurocopter to produce 50 examples of the company’s biggest helicopter, the EC725 Super Cougar, for all three of the Brazilian Armed Forces at the Helibras plant, in Brazil; and, of course, the more than €1-billion KC-390 military tanker/transport programme of national aircraft manufacturer Embraer.
Likewise, Australia will use its rising defence budget to further develop its local industry.
In its 2009 Defence White Paper, published only a few weeks ago, the Australian government notes that a “significant proportion of the funding allocated to Defence for the procurement of goods and services is likely to go to locally based companies, which are a key element of the Australian industrial landscape”.
“Growing the capacity and competitiveness of the local defence industry is a policy
objective of government and will require
ongoing investment in skills development, workforce growth and improved productivity.”
Note that neither Australia nor Brazil faces any immediate external threat.
“Australia has been creating an environment in which international players come into their national industry and invest, and so
create a sustainable industry,” highlights Sadik.
“South Africa should have the same attitude and welcome foreign investment. Defence is a global industry and the global trend is consolidation.
“The customer base is quite concentrated
– it is composed of governments. There is fierce competition for a limited number of programmes.
“Regarding missiles, for example, Europe and the US have already consolidated their missiles businesses.”
Meanwhile, Denel continues to make progress with its turnaround strategy.
This year, the group has an order book of R16 048-million, including confirmed contracts – up substantially from R3 749-million
in 2006. Revenues for 2009 stand at R5 410-
million, in comparison with R2 731-million in 2006.
Efficiency has also improved significantly,
up from R353 293 for every employee in 2006 to R746 460 for every employee this year, and Denel wants to increase this.
The provisions for contract losses and
impairments have dropped from R551,8-million, in 2006, to R55,9-million this year. Regarding cash flow (before financing), in 2006, this involved an ouflow of R1 053-million,
while this year sees an inflow of R221-million.
In 2005, the group experienced bottom-line losses of R1 560,7-million, declining to R1 363,4-million in 2006, further reducing to R549,1-million in 2007 and R347,2-million in 2008. The figure for 2009 will be released by this coming August.
Of the group’s four subsidiaries in which it has a strategic equity partner – Turbomeca Africa (Denel’s share is 49%), Denel Saab Aerostructures (80% Denel), Carl Zeiss Optronics (30% Denel), and Rheinmetall Denel Munitions (49% Denel) – three are already turning around.
Carl Zeiss Optronics has experienced a 100% increase in revenues in two years.
(In subsidiaries in which Denel now has a minority shareholding, the group has a
golden share to protect South African intellectual property.)
Denel is also in a “quite advanced” stage of negotiations with a major international company to become a strategic equity partner in the group’s missiles business.
Edited by: Martin Zhuwakinyu